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Loans / Business, MSME and working capital loans
Topic 04 of 19

Business, MSME and working capital loans

Law as on 2026-10-30 Next review 2027-01-30 Applies to banks · NBFCs · all REs

Commercial lending is governed by an entirely different legal logic from retail borrowing. While retail loans depend on personal credit scores and salary slips, business credit lines—such as Cash Credit (CC), Overdrafts (OD), Letters of Credit (LC), and Term Loans—are structured around monthly Drawing Power, stock audits, hypothecated receivables, and restrictive debt covenants. A business borrower does not just risk corporate capital: directors and promoters who sign personal guarantees face the loss of their private family homes under the SARFAESI Act, recovery proceedings before the Debt Recovery Tribunal (DRT), and personal bankruptcy under the Insolvency and Bankruptcy Code (IBC).

However, Indian law grants substantial statutory leverage to registered enterprises. Under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), registered micro and small enterprises have a statutory right to receive payment within 45 days, backed by compound interest at three times the RBI bank rate and access to specialized Facilitation Councils that override private arbitration clauses. This section covers working capital operations, Udyam registration benefits, CGTMSE guarantee limits, Section 43B(h) tax compliance, insolvency thresholds, and personal guarantee protections.

What this topic covers

01 Bank guarantees and Letters of Credit: invocation rules and court injunctions Bank Guarantees (BGs) and Letters of Credit (LCs) are non-fund based credit facilities that operate as independent, autonomous co… Read → 02 Business stress, SMA classification, and the RBI MSME revival framework When a business misses a loan payment or overdraws its cash credit limit, banks do not wait 90 days to take notice. Under RBI pru… Read → 03 Business term loans: project finance, equipment loans, and loan covenants A business term loan is a medium- or long-term borrowing facility designed to acquire fixed capital assets—such as industrial lan… Read → 04 Cheque bounce in business: Section 138, director liability, and statutory defences In Indian business transactions, issuing a cheque that bounces due to insufficient funds or a stop-payment instruction is a crimi… Read → 05 Collateral-free lending and CGTMSE: ₹5 crore guarantee cover and borrower liabilities Collateral-free lending allows Micro and Small Enterprises (MSEs) to secure business term loans and working capital without pledg… Read → 06 Delayed payments to MSMEs: Section 15 to 24, 3x bank rate interest, and Samadhaan portal Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) gives registered Micro and Small Enterpris… Read → 07 Government business loan schemes: Mudra, PMEGP, and Stand-Up India Central government business loan schemes—such as Pradhan Mantri Mudra Yojana (PMMY), the Prime Minister's Employment Generation P… Read → 08 MSME definition, composite criteria, and Udyam registration rules In India, a business is classified as a Micro, Small, or Medium Enterprise (MSME) based on composite criteria combining investmen… Read → 09 Personal guarantees and promoter liability: Section 128 and the Lalit Kumar Jain ruling A personal guarantee strips away the legal shield of limited liability that normally protects company directors and shareholders.… Read → 10 Prepayment and foreclosure rules for business loans: MSE exemptions and penalties Prepayment and foreclosure charges on business loans differ sharply from individual consumer loans. While the Reserve Bank of Ind… Read → 11 SARFAESI, DRT, and IBC for business borrowers: thresholds and defences A defaulting business borrower in India faces three separate statutory recovery and insolvency pathways: the SARFAESI Act for ext… Read → 12 Business loan tax rules: Section 43B(h) MSME disallowance and interest deductions In Indian business taxation, borrowing capital and paying suppliers attract strict compliance rules under the Income-tax Act. Und… Read → 13 Working capital facilities: Cash Credit, Drawing Power, and stock audits A working capital facility finances the day-to-day operating cycle of a business—purchasing raw materials, maintaining inventory,… Read →

Sources

  1. India Code, The Micro, Small and Medium Enterprises Development Act, 2006, indiacode.nic.in, accessed 30 October 2026.
  2. India Code, The Insolvency and Bankruptcy Code, 2016, indiacode.nic.in, accessed 30 October 2026.
  3. Reserve Bank of India, Master Direction – Lending to Micro, Small & Medium Enterprises (MSME) Sector, rbi.org.in, accessed 30 October 2026.